Small EU Firms Hold Mountain Of Debt, Could Be Next Major Headache For Banks
The European Union is doing the same as they did in 2008-09, extend and pretend, dishing out cheap loans to businesses and hoping for a recovery.
What’s worrying today is that excessive optimism comes as European governments invest in the recovery by increasing public spending as the central bank keeps rates low and floods capital markets with liquidity.
The problem is that banks have high exposure to small business loans, which is the backbone of the continent’s economy. If these businesses fail, another round of economic pain is dead ahead.
WSJ interviews Miguel Ríos, who operates four karaoke bars in Barcelona, said the pandemic and resulting government shutdown of his businesses forced him to borrow nearly $100k and put ten of his employees on a government wage-support program. He said his bars had been shuttered for almost one year as he is on the brink of financial disaster, with piles of insurmountable debt.
“We are resisting thanks to savings and bank loans, but we can’t keep like this much longer,” Ríos said.
Many small and medium-sized enterprise operators like Ríos are barely surviving through the pandemic thanks to cheap bank loans. Regional banks across the continent have loaned $2.43 trillion to them, approximately 40% of their entire loan portfolio.
Many lenders have cleaned up their loan portfolios since the last financial crisis, but many have struggled to turn profits in a negative-rates environment.
WSJ spots a big problem for banks: the likely rise of non-performing loans for small and medium enterprises could be nearing.
Bank regulators fear a wave of defaults could trigger another European banking crisis, mostly since the economy is set to shrink again amid the resurgent pandemic.
Analysts at banks including JPMorgan Chase & Co. and UBS Group AG have already downgraded the euro-area economy for the start of the year thanks to increased lockdowns and a new mutant coronavirus running rampant in the region.
Andrea Enria, the head of banking supervision at the European Central Bank, warned non-performing loans could exceed $1.7 trillion, which is more than the last financial crisis.
Similar to the US, small businesses in Europe overwhelmingly power the economy. Companies with 250 employees account for 99.8% of all firms and two-thirds of all private-sector jobs on the continent.
Small firms have massive economic weight on the continent, and with many under pressure, this spells bad news for a robust recovery.
With $26 trillion injected by central banks, massive liquidity injections have been used mostly to perpetuate elevated government spending, fundamentally current spending, and fund public debt.
The second is that corporate balance sheets have been damaged to a level that will make it difficult to see significant investment growth above depreciation. SP Global expects global capital expenditure to remain weak in 2021.
Non-performing loan ratios for small and medium-sized firms remain stubbornly high for European banks.
The latest European Banking Authority survey shows loans for small and medium-sized firms may deteriorate over the next 12 months.
While lockdowns and slow vaccinations aren’t helping the recovery, it’s estimated that 25% of eurozone companies are likely to face cash-flow problems this year with rising insolvency risks if government support doesn’t continue.
Small and medium-sized firm troubles have yet to be completely shifted to banks due to a series of programs rolled out across the continent.
“These include moratoria on loan repayments, public guarantees on loans and wage subsidies to keep people in jobs. But regulators and analysts say those are just postponing problems,” WSJ notes.
Cristina Paradisi, who owns two clothing shops, said she is always worried about the future. Her shops are located in the northern Italian province of Pesaro e Urbino where strict lockdowns and government restrictions have limited customers. Sales have dropped, her loan payments placed under a moratorium, as she may risk insolvency if sales don’t increase this year.
“Just by opening the doors of our shops, we lose money,“Paradisi said.
While many European banks in recent years increased their exposure to small businesses due to negative rates, which forced them to search for higher yields, a debt tsunami could be nearing as recovery hopes dim.
“We have set up an SOS line and we are getting calls from people who are desperate and don’t know how to go on,” said Giuseppe Palmisano, president of an organization that represents small companies and entrepreneurs in Italy. “People cry on the phone, I even fear some are thinking about suicide.”
Almost 6,500 offences related to the CCP virus were prosecuted in the UK in the first six months of the pandemic, according to statistics published by the Crown Prosecution Service (CPS) on Thursday.
Between Apr. 1 and Sept. 30 last year, 2,106 defendants were prosecuted for 6,469CCP (Chinese Communist Party) virus-related offences, with a conviction rate of 90 percent.
DPP@MaxHillQC said: “We are determined to see criminality during lockdown periods reflected in court. Particularly appalling is the high number of assaults on emergency workers and I will continue to do everything in my power to protect those who keep us safe.”
Almost 1,200 offences were prosecuted under the COVID-19 legislation, which forbids non-essential travel and unlawful gatherings.
In cases not prosecuted under the COVID-19 legislation, the CPS has introduced a “coronavirus flag” on its case management system to highlight crimes related to the CCP virus as an aggravating feature at sentencing.
Among all CCP virus-related offences, assaults on emergency workers were the most common, with 1,688 offences charged.
Officers of the Metropolitan Police patrol in Victoria Park, east London, on April 11, 2020. (Tolga Akmen/AFP via Getty Images)
Many of the assaults were committed against police officers, who were coughed at, spat on, kicked, bitten, or hit with heavy objects when trying to stop suspected breaches of CCP virus restrictions.
Max Hill QC, Director of Public Prosecutions, said the high number of assaults on emergency workers was “particularly appalling.”
“I will continue to do everything in my power to protect those who so selflessly keep us safe during this crisis,” he said.
The UK has been under varying levels of CCP virus restrictions since the pandemic began last spring.
Earlier this month, Prime Minister Boris Johnson put the whole of England under the third national lockdown to curb the spread of a new variant first detected in southeast England, which he said had a higher transmissibility than the old variant.
Police forces, including the Metropolitan Police in London, have said they are taking a stricter approach to enforcing the lockdown rules.
Martin Hewitt, chair of the National Police Chief Council, said on July 13 that he would make “no apology” for the almost 45,000 fixed penalty notices (FPN) that had been issued against rule-breakers.
Even police officers have sometimes found themselves on the wrong side of the law.
The Metropolitan Police said on Wednesday that nine of its officers had been fined after they were caught dining in a local café.
Bavaria-Wide Ban On Alcohol Consumption In Public Areas Overturned
German Chancellor Angela Merkel, who has struggled to impose lockdowns by consensus with the leaders of Germany’s various states, is now seeing Bavaria, one of the most significant and most economically vital regions of Germany, buck the latest national lockdown extension.
According to RT News, in an unexpected win for the people, the Bavarian Administrative Court temporarily suspended the statewide ban on drinking alcohol in public areas, initially introduced by lawmakers to mitigate the COVID-19’s spread.
On Tuesday, Bavarian judges temporarily suspended the statewide ban on consuming alcohol in public spaces in Passau, Regensburg, and Amberg.
A man from Regensburg mounted a legal suit against the Bavarian State Government, claiming they overstepped their bounds by announcing a complete ban on outdoor alcohol consumption in public places.
Local news BR24 said judges explained that the Infection Protection Act allows for the alcohol ban, but only in certain places. Therefore, the court temporarily suspended the order allowing local municipalities to choose whether a ban should be reinstated.
“The decision of the Bavarian Administrative Court is regrettable, as alcohol disinhibits and contributes to a more lax approach to the absolutely necessary hygiene distances,” the state chancellery stated. “We will therefore reinstate the old regulation whereby municipalities determine certain places where alcohol consumption in public spaces is prohibited.”
The ban on drinking alcohol in public places throughout Bavaria had been enforced since mid-December.
According to the court, the man also attempted to persuade judges to overturn other virus measures — but BR24 noted that it came with little success. He specifically wanted libraries reopened and wanted the 9.3-mile rule for day-tourist trips suspended.
The virus has walloped Germany. More than two million infections have been recorded, along with 47,600 deaths virus-related deaths. The country is currently in lockdown, with most stores and schools closed.
Merkel extended the countrywide lockdown on Tuesday for the next couple of weeks, at least through Feb. 14, due to contagious mutations of the virus.
Bavaria is a landlocked state in Germany’s south-east and home to Oktoberfest.
For the first time since World War II, Oktoberfest was canceled in 2020 due to the pandemic, crushing the area’s local economy.
Overturning the bans is a massive win for the people of Bavaria and the local economy. As we’ve shown, lockdowns don’t work; also, the use of polymerase chain reaction tests can be misleading by registering false positives.